Thursday, February 24, 2011

It’s not often that I pick up a copy of the New York Times at the Dallas Fort Worth airport and find myself being quoted.But that’s what happened today, en-route to Orlando for a few days of sightseeing in Central Florida.On a page titled “Square Feet”, the story was about Vancouver’s new effort to sell the Olympic Village condos at prices cut by 30%. The story was written by Linda Baker, an acclaimed Portland, Oregon journalist who I met in Vancouver and who has previously written at least two stories about Vancouver real estate.

This story (which is set out in the previous post) was accompanied by two photos; one from an upper floor suite showing roof terraces and a view of the city; and another of potential customers lined up outside the sales office.

The story features Senator Larry Campbell who lives in a 600 square foot suite he bought in 2007 for $580,000.(I hope it has a good view.)The senator is pleased to be living in a ‘legacy’ project and claims not to be bothered by the development’s financial troubles.

While I was familiar with much of the information contained in the story, there were a few surprises.It appears someone told the journalist that it was the City’s NPA administration that encouraged the developer to build very high end units back in 2006.I have always believed this was a decision made by the developer and Bob Rennie, his marketing advisor. I still believe this.

It is interesting to note that an email from the Mayor says he disagreed with the decisions to guarantee the financing and “prioritize” high-end housing.He doesn’t say whether he would have preferred that the construction on the athletes’ housing stop once the lender claimed that Millennium was in default of its loan due to cost over-runs.

The story includes a quote from Peter Wall who states that cities around the world have encountered difficulties transforming athletes’ villages into permanent housing. I found this surprising since he was one of the final bidders on the site.

The story also quotes Thom Armstrong of the Coop Housing Federation who, not surprisingly, is very complimentary towards the city for filling the gap left by federal and provincial cutbacks.However, I was surprised to read that only 30 residents have moved into the 252 city-owned social housing and rental housing units.If this true, I hope there is an immediate investigation into what continues to go wrong with these buildings.After all, it is now 11 months since the athletes moved out of these units.

What did I have to say?While the City Manager stated that the city’s target is to bring the project in on balance, I am quoted as saying it will be a financial failure, with losses in the “hundreds of millions”.However I do conclude by stating what I have always believed: “One day, all these problems will be distant memories, and people who choose to live there will be glad they did.”

On the bottom half of the same page is a fascinating story about new housing developments in Boston.It appears that another company called Millennium-this time Millennium Partners-Boston is seeking approvals to build out projects that were approved as condominiums, as rental.Yes, that’s right.They prefer to build rental rather than condominiums.And they are not alone.Municipal authorities expect construction to start this year on 21 buildings containing 1,855 units, nearly all rentals.In fact, rental housing is described as one of the few hotspots in a sputtering economy!

The article goes on to say that with rents up to $4 per square foot, and construction costs (I assume development costs) down to $500 a foot, high quality apartments renting for $5,000 a month provide a reasonable mid-single digit yield.

Elsewhere on the same page was a photo of an older brick apartment building with an $8.5 million price tag.While it was an attractive building, I thought this seemed like a lot of money for a suite.But then I realized the price was for 76 suites-13 one bedrooms, 30 two bedrooms, 24 three bedrooms, and 9 four bedrooms.It sold for nine times the rent roll.

Elsewhere in the business section, it was noted that real estate prices slid in just about every part of the country in December, pushing a housing market that once seemed to be rebounding nearly back to its lowest level since the crash began.Analysts are split on whether the market can drop any further.

I suspect I am going to see some spectacular deals in Orlando, especially when compared with the price of housing at the Olympic Village...I mean, the Village on False Creek....even at 30% off the earlier prices.

Square Feet

In Vancouver, a New Effort to Sell Olympic Condos

By LINDA BAKER

Published: February 22, 2011

VANCOUVER, British Columbia — On a typical weekend Larry W. Campbell flies into this city from Ottawa, where he is a Liberal Party senator representing British Columbia, then spends the night at his 600-square-foot condominium at the Olympic Village.

Farah Nosh for The New York Times

Farah Nosh for The New York Times

Prospective buyers lined up last week.

Mr. Campbell, who was the mayor of Vancouver in 2002 when the city won the bid for the 2010 Winter Olympics, said he liked the community’s environmentally friendly features, including radiant ceiling heat and toilets flushed with recycled water, as well as the ample public spaces and proximity to the Canada Line rapid transit station. He paid 580,000 Canadian dollars for the unit in 2007.

His enthusiasm for the development is not widely shared, however. A year after the winter games, fewer than half of the 737 condos have been sold — almost all as preconstruction sales in 2007 — and the city’s taxpayers now owe about 750 million Canadian dollars for a project that was never intended to be a public sector development. (On Tuesday, one Canadian dollar was worth $1.01 American dollars.)

Last week the city began a fresh effort to sell off the remaining condos, rebranding the cluster of 16 midrise buildings that once housed elite athletes as the Village on False Creek — a reference to the inlet bordering the development — and slashing prices by an average of 30 percent. “It is a lightning rod, politically and journalistically,” said Bob Rennie, the principal of Rennie Marketing Systems, which is handling the Village on False Creek marketing and sales campaign.

Mr. Campbell, who left office in 2005 to serve in Ottawa, says the development’s financial troubles, which are chronicled almost daily in the news media, do not bother him. “I am part of a new neighborhood in what was industrial wasteland,” he said. “It’s a legacy.”

But as initiatives to revitalize the development move forward, the debate over what the city did wrong and what it might have done differently shows no signs of abating.

Much of the controversy dates back to 2006, when the city awarded the Olympic Village contract to Millennium Development of Vancouver, largely because the company offered the highest bid at 193 million Canadian dollars. Because the city retained title to the land, the developer was unable to secure financing from Canadian banks, and sought out an American hedge fund, which demanded a loan guarantee from the city. Largely because of the high cost of the land, Millennium, with encouragement from the city, priced most of the condos over 1 million Canadian dollars, well into the “luxury” range, a strategy that backfired in the recession.

Two years later, when cost overruns and the financial crisis put Millennium in default to Fortress Investment Group, its American financier, the City Council lent the developer 100 million Canadian dollars. That created a scandal that helped oust the city government, which was led by the Nonpartisan Association party, or N.P.A., and Mayor Sam Sullivan. In 2009 the city took over the entire loan of 750 million Canadian dollars, leading Mayor Gregor Robertson of the rival Vision Vancouver party to announce that “taxpayers were on the hook” for the whole project.

Mr. Robertson said in an e-mail that he disagreed with the decisions to guarantee the financing and “prioritize” high-end housing. “The biggest lesson is that the city should not be gambling taxpayers’ dollars on luxury real estate,” he wrote. “That was a key decision made by the last council and it’s what opened the city up to enormous financial risk.”

Suzanne Anton, an N.P.A. councilwoman, said the project’s financing problems actually dated back to 2002, when planners decided the village design should shift away from the high-rise towers that dominated the Vancouver skyline — which would have been cheaper to build and sell or rent. Ms. Anton also said Mr. Robertson should have been the “chief huckster” for the village. “Instead, he’s spent two years making negative remarks about the previous council,” she said.

After the Olympics, the situation continued to deteriorate. When Millennium failed to sell more units, the city and the developer decided in November to hand over the troubled project to Ernst & Young, a receiver now jointly managing the project with city officials.

Cities around the world have encountered difficulties transforming athletes’ villages into permanent housing, said Peter Wall, a co-founder of Wall Financial, which is building a 550-unit condo development across the street from the Olympic Village. Nevertheless, Mr. Wall said, development was “so easy to do” in Vancouver, a fast-growing city of about 600,000 noted for its urban planning expertise and relatively stable real estate values. He added that his company’s development, the Wall Center False Creek, sold out in five months last fall, at prices that started at about 300,000 Canadian dollars for a 518-square-foot one-bedroom.

Mr. Wall, whose company submitted one of the original Olympic Village bids, said Millennium was undercapitalized and that the focus on cutting-edge environmental initiatives drove up costs.

But Brent Toderian, the city’s director of planning, said the development, intended as a green demonstration project, has “transformed city building in every aspect.” The Olympic Village site, a rare case in which the entire neighborhood has a LEED Platinum rating, features a net-zero building that produces as much as energy as it uses, sites for urban agriculture and a neighborhood energy utility that uses heat recovered from raw sewage to heat all the buildings in the development. And the area around the village is becoming a cultural and residential destination.

As the debate continues, there are signs of movement at the village, where 230 condos are back on the market at prices ranging from 249,000 Canadian dollars for a studio to 1.8 million Canadian dollars for a penthouse. (Sales had been suspended since November).

Mr. Rennie said he expected to have sold 56 units by the end of the month. “I am being paid to remove the words ‘ghost town,’ ” he said. He appears to be well on the way to doing that: On Tuesday, he said in a news release that 128 units were sold over the weekend, at an average price of 778,800 Canadian dollars.

About 30 residents have also moved into the project’s 252 subsidized rental units, which are located in three buildings managed by the Co-op Housing Federation of B.C.. Half of those units are set aside for middle-income workers like police officers; the other half are for low-income residents.

The city has come under fire for cost overruns in the nonmarket buildings as well as cuts to the number of units. However, Thom Armstrong, the federation’s executive director, said the city should be applauded for filling the gap left by federal and provincial housing cutbacks. “They’re doing everything they can and taking hits for it,” he said.

Will the city recover its money on the project? “Our target is absolutely to bring it in on balance,” said Penny Ballem, Vancouver’s city manager.

Others are not so certain. “Olympic Village is going to be a financial failure,” said Michael Geller, a local developer who predicted losses in the “hundreds of millions.”

Even so, Mr. Geller said, “One day, all of these problems will be distant memories, and people who choose to live there will be glad they did.”

I was saddened to hear yesterday about the major earthquake in Christchurch. The news was all the more troubling since I have been there, and know what a wonderful city it is. Below is a reprint of a blog posting from four years ago when Sally and I were there during our around the world trip.

Once again, we were spoilt by a New Zealand hotel. This time, we were given a two storey, two bedroom penthouse suite on the top floor of the Grand Chancellor, Christchurch’s tallest hotel. We immediately set off to find some new friends, so we could have a party!

Christchurch, like Wellington, has a wonderful feel about it. With a population of just under 400,000, it is New Zealand’s second city, after Auckland. It’s a planned city, (Adelaide in Australia is based on the same plan sent over from England), with extensive parks and gardens. The city has a very English character, with punting along the river, and many gothic style buildings, including the Cathedral. Interestingly, the university was relocated from its historic downtown location, to the outskirts, and the former campus has now been converted into a cultural precinct. (Quite the opposite of what has been happening in Vancouver, where SFU is converting heritage downtown buildings into a university.)

Trams were used in Christchurch from the early 20th century until the 50’s. Today, restored trams transport tourists on a 2.5 km inner city loop to various landmarks around the downtown. (Perhaps this is what inspired Dave Rudberg to propose a similar system for Vancouver). The tram stops at one of the most interesting streets I have ever seen. It is symetrical. That is to say, the buildings along one side have been matched on the other, although some have changed over time.

I was also impressed with the Art Gallery, which is located at one of the stops, and cost only $40 million, just a few years ago. The main stop is Cathedral Square, which is surrounded by heritage buildings, and connected to a pedestrian mall which feels a lot like Granville Mall. (It seems like there are the same black dressed, dirty, pierced, and tattooed kids, who move around the world from mall to mall.)

One place which did feel very different was the Antarctic. Well, the Antarctica exhibit, located near the airport. Since it was twice voted New Zealand’s best tourist attraction, we decided we ought to go. And we’re glad we did. Although, after experiencing the -24 degree snowstorm, I now feel a cold coming on!As for the storm, you walk into a room, where a flashing light lets you know how many minutes until the next snow storm. You put on a large parka, and rubber overshoes, (so as not to dirty the snow), and enter a special chamber and wait. Sure enough, the carefully placed warning flags start blowing, and the next thing you know, the wind is howling, and there are blasts of cold air. And I’m wearing shorts! After the snow storm, there are visits to a penguin colony, and various other interactive exhibits. Having gone through the centre, we now feel we know much more about Antartica, than we do about our own Arctic.

We finished off our visit with a ride up the Gondola, which reminded us of Grouse Mountain. From there we could see the Alps, and Akaroa, a French settlement, and our next destination. Speaking of Alps, I must confess that before coming here, I wasn’t aware that skiing is so popular in New Zealand. In fact, there are numerous resorts in the South Island, and the sport appeals to many New Zealanders, when they are not tramping, surfing, bungee jumping, or cycling around the country.

I heard this morning that many of the historic buildings have been destroyed...the Cathedral Spire has fallen down, and at least 65 people have been killed. Interestingly, when we were in Auckland we participated in an exhibit in the museum which was designed to educate people about the effects of an earthquake. It was very realistic, and something that I thought we should recreate in Vancouver. After all, a big quake is going to happen here too. It's just a matter of time. My thoughts are with all the lovely people we met there, and the rest of the people who are today digging out.

Tuesday, February 15, 2011

A year after the Vancouver 2010 Olympics, the public is still asking what went wrong (and right) with the Olympic Village project. What could have been done differently? What are the housing, planning and other policy lessons?

PlanTalk: Housing and Development Lessons from the Olympic Village, will be led by an expert panel that includes developer Michael Geller, UBC Associate Vice President Nancy Knight and SFU Professor Doug McArthur, and city councilor Geoff Meggs. The forum will be moderated by Vancouver journalist and blogger Frances Bula. Co-sponsored by Think City, SFU School of Public Policy and the Planning Institute of BC's South Coast chapter, the discussion will take place from 7 p.m. to 9:30 p.m at the Segal Business School at Pender and Granville. Admission is $25 ($15 for students), registration is recommended. Here's the SFU link to the event

Friday, February 11, 2011

Earlier this week I was invited by Global TV to comment on whether the City should consider a bulk sale of the Olympic Village units to the Aquilini family. I suggested that this was an old story, since I was told Rennie would soon be announcing a new marketing program. Nonetheless, we did the interview and I said the City should not entertain a bulk sale, but instead sell the units itself, notwithstanding the holding costs.

The next day, I had a call from CTV who had learned that there would be a forthcoming announcement regarding a new sales program. Would I comment? Of course I would.

However, I regretted this decision when Shannon Paterson asked me on camera how much the discount would have to be. Thinking about the earlier prices, and the prices at the nearby Wall project and Onni's downtown projects, I blurted out 30%. Later that evening, my wife asked me why I would say that. Did I know something, or was I just making it up. I told her I was just making it up. But given the context, and my experience, I thought it was a reasonable number.

Yesterday, the receiver issued his lengthy report. After retaining three real estate consulting firms...Burgess Cawley Sullivan, Altus, Urban Analytics, and working with Rennie Marketing Systems, they came up with a recommended strategy to put 230 units on the market at a discount.....yes, 30% discount and hold off selling the very high end units until perhaps next year. They also recommended renting up to 127 units priced under $1 million.

While I obviously agree with the recommended 30% discount and deferring some sales of high end units till later, I am disturbed by the receiver’s recommendation to rent up to 127 units…

If all 127 units are rented, this triggers an upfront HST payment in the order of $10 million. It will also result in thousands of dollars in monthly losses, no property tax recoveries, and potential for significant downstream costs and losses.

As we all know, when you drive a car off the lot, the value goes down….the same holds true for high end condos that are rented out…

Yes, it creates some market rental, and could result in more body heat, but let’s not forget that to date only 87 of the 119 Millennium rental units were leased up, with some tenants paying under the $2.30 a foot the city hopes to get for these units.

(As an aside, the larger a unit, the lower the rent on a square foot basis…so a $800,000 two bedroom and den unit will require a $96,000 up front HST payment, followed by thousands in monthly subsidies.) Guess who’s paying those subsidies.

I can’t understand how this can be a fiscally prudent approach, especially since there are better alternatives. For example, the city could sell these units with creative financing packages that would defer a portion of the initial price to a later date with a ‘silent second mortgage”’. This approach is used extensively in other cities and countries, but it does not seem to have been even considered at all by the receiver. By putting certain conditions in place, these units could be differentiated from the other units being offered for sale. (ie: they cannot be rented out, priority to city emergency workers, etc.)

In a similar vein, the receiver doesn’t seem to have considered my earlier suggestion that the Millennium rental units be strata-titled so that they can eventually be sold off over time. This could help reduce our losses by tens of millions of dollars.

Now I hope you better understand why I was so insistant that the social/rental housing units be sold last year to recover $110 million spent, and why I thought the City should have agreed last year to reduce prices when the program was launched in May 2010.

Prices haven’t dropped 30% since May 2010. As Bob Rennie has eloquently stated, the pricing was wrong in May….he knew it, most industry experts knew it….but sadly the City chose not to allow a reduction in prices during 2010. That was a costly mistake.

I know that many real estate experts share my concerns with the receiver's recommended strategy…I therefore hope the receiver and city administration will be willing to meet with us and explore further how best to minimize the losses which today I estimate to be at least $150 million.

Monday, February 7, 2011

When I questioned some of the numbers used in his report, Dale McClanaghan sent me links to all the background studies commissioned by him and the city. I have only just started to go through them, but the first that I looked at, 2D by Coriolis is a minefield of information. Moreover, unless I am mistaken, it seems to conflict with the cost numbers used in the summary report. While I await clarification, here are the links to the various background reports. I'm sure these cost tens of thousands of dollars to produce, and it is great that the city has made them available for general use. Based on what I have seen so far, this information is a must read for anyone interested in rental housing in Vancouver and the region.

Data from the rental report was set out in the powerpoint presentation.

It takes at least two hours to go through the report, but since it is raining today, I highly recommend it. In fact, even if it stops raining, (and I hope it does since I’m playing in a SuperBowl golf tournament), it is worth reading.

The report was prepared by a consulting firm headed by Dale McClanaghan, (yes a former president of the NPA) with input from Coriolis, another planning and real estate consulting firm and Altus Group, which includes cost consultants, appraisers and the like. All are respected firms in the planning and economic consulting field.

It provides a very comprehensive overview of Vancouver’s rental housing stock…where it is, when it was built, its condition, the required cost of renovations and repair, replacement costs, along with policy options and much more.

While I have some concerns with some of what is in the document, and with some of what is not in the document, overall I think it is a very good piece of work.

I was surprised that Vision would hire a former NPA president to undertake a comprehensive housing strategy but gave them full marks for doing so…(Although I would note Dale was also once head of Vancity Enterprises and has been in the housing consulting and development business for a while).

However, trying to put politics aside for a moment, the report includes some fascinating information that should interest anyone who wonders why STIR was introduced; why rental housing seems so expensive; why there are so many older rental buildings around the city and so few newer ones; etc.

One of the tables on page 16 sets out the rents for different types of rental housing from SRO’s to Single Family Rental houses. (It includes secondary suites, rented condos and single family houses). I was surprised by the high number of houses being rented out until I realized that the report uses Census Data. I suspect the single family catagory includes all those houses that have been illegally divided up into suites…(no doubt some of you live in these suites but never thought about the fact they are illegal.)

While I still need to spend more time going through the report , there is some information that surprises me. For one thing, it suggests the condition of the rental housing stock is much better than I expected. Using a sample of typical buildings, it examines the repair cost of bringing rental housing up to an acceptable standard. However, rather than set out the estimated up front repair costs, it annualizes them. This somewhat disguises just how much money needs to be spent, and what impact such expenditures might have on rents.

I think this is a very important issue, not just for the privately owned rental stock, but also for the non-profit and coop housing. My belief is that thousands of rental units need tens of thousands of dollars of repairs or the units will eventually become uninhabitable…but the money is not being spent. The non-profits/coops like Entre Nous Femmes don’t have the money and private landlords either don’t have the money, or don’t want to spend it since it may require vacating units and charging higher rents (and we all know what sometimes happens to landlords who evict people to undertake repairs…and then seek higher rents…yes, photos of their properties end up on the front pages of local newspapers, along with housing activists and politicians.

(As an aside, it sometimes seems that the landlords who want to fix up buildings and increase rents are subjected to even more criticism than those who allow their buildings to rot or possibly burn down, but maintain lower rents.)

In my opinion, the report does not fully express the seriousness of this issue.

The report also highlights the financial gap between the ECONOMIC rent, and the MARKET rent of new construction. The economic rent is that which needs to be charged to cover the capital costs, operating costs, taxes, etc.

(As another aside, I would invite readers, especially those in the housing and development field, to look at table 29 on page 95 and tell me if you agree with me that some of the cost items seem very, very odd.)

However, notwithstanding these and other criticisms, I think this is an important piece of work, and one which helps explain the housing affordability challenges facing our city. As more and more people need rental housing, the cost of producing it is going through the roof, if you’ll pardon the pun. Sadly, there is inadequately zoned land to accommodate the required housing, and I suspect that we are going to have to be much more innovative in figuring out how to produce more new units, how to repair the existing stock, and how to address the related problems of homelessness, which of course come with a lot of related issues including dealing with mental illness, drug and alcohol addictions.

Bob Ransford has an excellent article in today's Vancouver Sun challenging the new municipal approach to financing growth by seeking to share in the 'profits' resulting from rezoning. Coincidentally, I had similar concerns which prompted me to write an op-ed piece earlier this year. Rather than wait for it to be published, here is what I have to say on the same topic...

At a meeting of Vancouver City Council last summer, Councillor David Cadman asked the Director of Planning an interesting question.Does new development pay for itself? You may be surprised by the answer.

For years, municipalities across Canada have been struggling with how best to finance the costs associated with new development. Charging new development to help finance the costs and impacts of growth has evolved in Vancouver since the 1980’s. In 2004, City Council approved a report entitled “Financing Growth” which identified two revenue sources:Development Cost Levies (DCL’s) that would be charged on all new developments to help pay for facilities; and Community Amenity Contributions (CAC’s) that would be charged when new development occurs through a rezoning.

These DCL and CAC fees are used to help finance childcare centres, parks, and social and replacement housing.However, the Financing Growth report raised an important question.Who really pays these fees?

While the cheque is written by the developer, City staff concluded that the fees are not really paid by the developer or ‘end user’ of the homes or businesses. Rather, they determined that the DCC’s and CAC’s are paid by the land owner, since these fees have a downward pressure on land values.

Most Vancouver developers and economists do not agree with this analysis.Instead, they contend new purchasers and tenants ultimately pay these additional costs through higher cost housing and commercial rents.

So is this a bad thing?Many would say there is nothing wrong with a system that charges new homeowners or office tenants for the additional services they consume.While I agree in principle, there is a serious problem with the City’s approach to financing growth, especially when it comes to rezonings.

Rather than charge a CAC based on the cost of providing services, the city calculates the CAC based on the increased value of the land.That’s right. The city’s policy is to collect about 75% of the increase in value or ‘lift’ from the developer.It is described as a ‘voluntary payment’ since a city is not supposed to sell zoning.

Again, some might think it is a good idea for the city to share in the increase in land value resulting from rezonings. However there are unforeseen problems with this approach, from many perspectives.

Firstly, it gives the city an incentive to improperly zone land and cause developers to bring forward rezoning applications which will hopefully result in payments to the city.However, if developers do not accept the rezoning risks, there will be insufficient zoned land for certain types of development resulting in higher housing costs. This is happening right now. New townhouse developments are very expensive since there are virtually no zoned townhouse sites in most parts of the city.

Furthermore, if landowners price their properties too high, there may be no ‘lift’ for the developer and City to share.This is happening now along the Cambie corridor where single family properties are priced well above their zoned value. Under this scenario, how will the city collect funds to pay for the required additional community amenities?

Neighbourhood associations should also be concerned with Vancouver’s current policy. When the payment to the city is tied to ‘the lift’ in value, politicians and officials may approve projects at much higher densities, just for the money. While they will deny this could ever happen, I am not so sure.

Finally, if rezonings do not get approved, there may be insufficient funds to finance much needed community services. Currently, most new childcare facilities are built by developers and financed through rezoning profits.No rezoning, no childcare. This is no way to plan a city.

So what is the solution?

New developments should be required to pay for themselves over time. However, rather than an ad-hoc ‘let’s make a deal approach’, the city should pre-zone land through a proper planning process, and impose pre-determined DCL’s and CAC’s to offset the cost of new community services.

While some might fear that ‘pre-zoning’ land will result in existing owners having to pay higher taxes, with assistance from BC Assessment, I am confident new zoning categories can be designed so that properties are assessed on their current use, not their future development potential.

Now, as for the answer to Councillor Cadman’s question, the Director of Planning reported that the city collects about 70% of the costs associated with development through DCL’s and CAC’s.However, if new developments are not allowed to go ahead, the overall costs to the city and region would be much greater.But that’s another story.